Brazil Interest Futures Rise on Central Bank Signal

Brazil’s interest-rate futures yields on contracts due before July 2012 rose as the central bank’s signal that it will raise rates to curb price increases offset a report showing inflation quickened less than expected.

Investors increased bets the central bank will raise its benchmark Selic interest rate, with the yield on the contract due July 2011 adding 6 basis points to 11.65 percent by 6:38 a.m. New York time, the highest intraday level since Dec. 8. On the agreement due April, the yield advanced 4 basis points to 11.15 percent.

Consumer prices as measured by the IPC-S Index, which gauges inflation in the country’s 12 biggest cities, climbed 0.87 percent in the 30 days through Dec. 22, from 1.06 percent in the 30 days ended Dec. 15, according to a report by Fundacao Getulio Vargas. That’s less than the median estimate for a 0.94 percent advance by seven economists polled by Bloomberg.

Brazil’s central bank yesterday signaled it may start raising interest rates from next month after forecasting inflation next year will be faster than previously expected. Policy makers need to “contain the mismatch between the pace of expansion of domestic demand and the production capacity of the economy,” according to the central bank’s quarterly inflation report released yesterday.

‘Preparing Ground’

“The report prepared the ground for incoming central bank Governor Alexandre Tombini to raise the benchmark interest rate at his first meeting,” Andre Perfeito, chief economist at Gradual Investimentos, which manages 2 billion reais ($1.2 billion) of assets, said in a phone interview from Sao Paulo.

Policy makers kept the Selic rate unchanged at 10.75 percent for a third straight meeting on Dec. 8, saying they needed more time to gauge the impact of an increase on bank reserve requirements on the economy. Earlier this year, they increased the Selic rate by 200 basis points from a record low 8.75 percent.

Brazil’s real strengthened for a third day in four versus the U.S. dollar gaining 0.2 percent to 1.6977 from a close of 1.7003 yesterday.

The central bank will release data on lending by private banks in November and total outstanding loans at 10:30 a.m. local time.

To contact the reporter on the story: Josue Leonel in Sao Paulo at jleonel@bloomberg.net

To contact the editor responsible for this story: Francisco Marcelino at mdeoliveira@bloomberg.net Gavin Serkin at gserkin@bloomberg.net.

Brazil Interest Futures Rise on Central Bank Signal
By Josue Leonel - Dec 23, 2010 3:23 PM ET